F6 Taxation (UK)

Section A: The UK tax system Section B: Income tax liabilities Section C: Chargeable gains Section D: Corporation tax liabilities Section E: Inheritance tax Section F: National insurance contributions Section G: Value Added Tax Section H: The obligations of tax payers and/or their agents Taxation (UK)

Section B: Income tax liabilities B2. Income from employment B3. Income from self – employment (Part 1) B3. Income from self – employment (Part 2) B5. The comprehensive computation of taxable income and income tax liability B2. Income from employment B3. Income from self – employment (Part 1) B3. Income from self – employment (Part 2) B5. The comprehensive computation of taxable income and income tax liability Designed to give you knowledge and application of:

 Recognise the factors that determine whether an engagement is treated as employment or self-employment. [2]  Recognise the basis of assessment for employment income. [2]  Recognise the allowable deductions, including travelling expenses. [2]  Discuss the use of the statutory approved mileage allowances. [2]  Identify P11D employees. [2]  Compute the amount of benefits assessable. [2] B2: Income from employment Learning outcomes

FactorsEmploymentSelf - employment Control Have to obey instructions of employer Usually able to decide for themselves Financial risk involved Do not risk their own capitalMay lose their capital if business fails Equipment Provided by employerProvided by themselves Substitute Cannot allocate the workDelegate and supervises the work Work correction Corrected in working hoursResponsible for putting right any unsatisfactory work, at their own expense and time. Holidays Employees are entitled to paid annual leave Does not get paid for holidays No. of people employed Work for only one employerCan work for a number of employers Mode of payment Weekly / monthly / etcPaid per contract Position Integral part of businessNot an integral part of business Obligation Obliged to accept work allotted to them Not obliged to accept work allotted to them Income from employment Factors that determine employment or self-employment Refer to Test Yourself 1 on page 24

Employment income Basis of assessment for employment income Salary, wages or remuneration arising under a contract of service received by the employee in respect of employment is considered income from employment. Example A restaurant waiter receives £4 as a tip from a customer for good service. The employer does not directly pay this income. However, the waiter has received this income as a result of his employment. This income is, therefore, taxable as employment income for the waiter. When is employment income taxable??? Employment income is taxable in the tax year in which the income is actually received. Income from employment is taxable on a receipt basis.

When is employment income received For individual employees a) Date when payment is made. b) Date when an employee becomes entitled to payment. Example: date when the salary cheque is received For directors a)Two alternatives given in the rule for individuals (above). b)Date on which income is credited to director in the accounting records of the company. c)End of the period of accounts, if director’s income for that period is determined by then. d)Date on which the amount is determined, at the end of the company’s period of accounts. Refer to Self Examination Question 1 on page 57

Identify P11D employees P11D employees are taxed on any benefits regardless of whether or not it is convertible into cash. They are assessed on the marginal cost incurred by the employer providing that benefit. Lower-paid employees “other than P11D employees are called “lower paid employees” They are taxed only on those benefits which are convertible into cash. Lower paid employment is where earnings for the tax year are less than £8,500.

P 11 D employees Company directors Earn at least £8,500 per annum  Earnings are totalled including benefits  No expenses are to be deducted from the earnings except contribution to an occupational pension scheme or to a payroll-giving scheme.  Are P11D employees regardless of their earnings unless they: work full-time and still earn less than £8,500 per annum AND  Have no material interest in the company i.e. hold less than 5% of the ordinary share capital of the company Refer to Test Yourself 4 on page 28 P11D employees

The amount of exempt benefits  Meal vouchers up to 15p per day.  Free / subsidised meals in a staff canteen, if available to all employees. (this exemption is to be removed from 2011/12 if the meals are provided as part of a salary sacrifice or flexible remuneration arrangement).  Cost of staff parties up to £150 per person per year. If this limit exceeds, then the whole amount is taxable, not just the excess over £150.  The provision of a parking place at / near an employee’s place of work.  Contributions by an employer towards additional household costs of an employee who works at home.  Payment by an employer of employee’s personal incidental expenses, when employee stays outside overnight for business, £5 per night within the UK or £10 per night outside the UK. If the limit is exceeded, the whole amount is taxable.  Reasonable removal expenses up to a maximum of £8,000 paid for by an employer when the employee first takes up employment or is transferred to a new location within the organisation.  An award of up to £5,000 made under a staff suggestion scheme.  Payments of up to £15,000 per academic year to an employee who is attending a full-time course at a recognised education establishment.

 The provision of one mobile phone for an employee’s use. If more than one mobile phone is provided then that is taxable.  Provision of workplace childcare or childcare vouchers of up to £55 per week, sports or recreation facility  The provision of qualifying sports or recreational facilities.  Provision of welfare counselling service for employees generally  Provision of pension information and advice if available to all the employees and costing less than £150 per employee per year.  Entertainment provided by a third party  Gifts from third parties up to £ 250 per donor (if exceeded, all taxable)  Long service awards  Interest free or low interest loans not exceeding £5,000.  Job related accommodation  Contributions to employees’ pension fund Refer to Test Yourself 5 on page 29 The amount of benefits assessable

Living accommodation Accommodation owned by the employer Accommodation rented by the employer Taxable value: Rateable value (this is the annual rent that would have been payable if the property had been let at market value) Taxable value:  Rent paid by the employer,or  Rateable value of accommodation whichever is higher Benefits assessable to all employees Living accommodation Vouchers exchangeable for goods or services Taxable value of living accommodation depends upon whether the accommodation is owned by employer or rented by employer. Benefits assessable to all employees

Taxable benefit for living accommodation is calculated as: £ Higher of: Rent paid by employerX Annual value of property Less: Employee contribution(X) Taxable benefitX  Necessary to reside for proper performance of duties  Accommodation provided for better performance of duties  It is customary to reside in provided accommodation  Accommodation is provided as part of security Job related accommodation Accommodation is treated as job related only if No taxable benefits arise in respect of job related accommodation. Living accommodation and job related accommodation

Voucher for goods / services If an employee:  Uses a credit token (such as a credit card) to obtain money, goods or services, or  Receives exchangeable vouchers (such as gift vochers), from his employer then he is taxed on the cost of providing the benefit, less any amount the employee contributes towards it. Exceptions  First 15p per day of meal vouchers are not taxable.  Entertainment & hospitality vouchers provided by a person other than the employer or someone connected with the employer are not taxable. Refer to Test Yourself 6 on page 32 Refer to Test Yourself 7 on page 32 Voucher for goods / services

Benefits assessable on P 11 D employees  Car provided for private use  Fuel provided for private use  Vans provided for private use  Beneficial loans  Assets loaned for private use  Ancillary services connected to living accommodation Important rule about benefits 1)Benefits are time apportioned if only available for part of the year 2)Benefits are reduced by any contribution made by employee (except fuel benefit) Benefits assessable on P11 D employees

Cars provided for private use £ (Manufacturer’s list price – Employee capital contribution) x Appropriate %X Less: Employee contribution for the private use of the car(X) Assessable benefitX The maximum employee’s capital contribution deductible is £5,000. Charge for private use The manufacturer’s list price of the car is the standard list price, plus the price of any accessories originally provided, and the price of any accessories provided at a later date costing at least £100. The list price is capped at £80,000 for these purposes.

(For petrol driven 15%, for diesel driven 18%). Appropriate percentage Co2 emission: specified percentage for g/km to 130g/km: 15% 75g/km or less: 5% Maximum percentage is 35% Any contribution from the employee will be deducted from taxable benefit 3% is added to percentage if car is diesel driven Emissions Co 15% percentage Appropriate 2 += Increase by 1% for every 5g/Km upto 230 g/km 235 g/km or more: 35% Refer to Example (Judi) on page 35 76g/km to 120g/km: 10%

The benefit is based on the Co 2 emission and is calculated as follows: Fuel for private use = £18,000 x Appropriate % (Same % as for car benefit) Any partial reimbursement by the employee will not affect the taxable benefit. The benefit is pro-rated if fuel provided for part of the tax year. Fuel for private use Refer to Test Yourself 10 on page 36 Vans provided for private use  The benefit is a fixed amount of £3,000 and The benefit is proportionately reduced if a van is unavailable for part of the tax year..  There will be an additional benefit of £550 if fuel is provided for private mileage.  Both the benefits are proportionately reduced if unavailable for part of the tax year.  While calculating benefit for private use of a van, the journey between home & work is not considered.  If vans are used by more than one employee, then amount of benefit is divided equally among all employees who use the vans for private purposes irrespective of the amount of private use by each of the employee Vans provided for private use

Beneficial loans Taxable benefit is:£ Interest on outstanding amount at the official rate of interestX Less: interest actually paid (if any)(X) Assessable benefitX  Loans made by employer in the ordinary course of his money lending business, at the same terms and conditions as loans to general public: no taxable benefit arises  If the amount of loan outstanding is < £5,000 at any time during the tax year, no benefit arises  A benefit arises on the interest on the whole loan, if the loan exceeds £5,000 and not just on the excess of the loan over £5,000.  If any amount of the loan is written off a benefit equal to the amount written off arises. Beneficial loan is one made to an employee by the employer which is either interest free or interest paid is less than the official rate of interest. Beneficial loans

Assets loaned to employee for private use Benefit is 20% of market value of the asset when it was first made available Example Excellent Plc provided Rower with a computer throughout the tax year for her personal use. The computer cost £1,500. Benefits assessable for the tax year in respect of the computer = £1,500 x 20% = £300. Methods of calculating assessable benefit  Average method: the official rate of interest is applied to the average of the balance at the beginning and at the end of the year. If the loan was repaid before the year end, then the balance at the time of repayment is taken.  Strict method: the official rate of interest is applied to the amount outstanding on a month by month basis. Methods of calculating assessable benefits

Ancillary services connected with living accommodation Heating, lighting, repairing / maintaining premises, provision of furniture. If accommodation is job related, the assessable value of ancillary service cannot exceed 10% of employee’s net earnings for the tax year. Net earnings = Total Earnings (without considering ancillary services & use of furniture) – Allowable Expenses. Refer to Example (Jack) on page 39 Ancillary services connected with living accomodation

The allowable deductions Expenses that are always deductible:  Contribution to registered occupational pension  Subscriptions to professional bodies approved by HMRC relevant to duties of employment  Donations to charity made under payroll deduction scheme operated by employer  Mileage allowance  Payment of employment related liabilities and premiums for insurance against them Expenses that are deductible only on proving to be employment related:  Travel expenses  Wholly, exclusively and necessarily incurred in the performance of his duties of employment  Capital allowances Refer to Test Yourself 17 on page 43

The use of the statutory approved mileage allowances The employer gives a mileage allowance to those employees who use their own vehicles on business. These allowances are tax-free to the extent of the amount approved by HMRC. First 10,000 miles in the tax year Each mile over 10,000 miles in the tax year Motor cars and vans40p per mile25p per mile Motor cycles24p per mile Bicycles20p per mile Refer to Self Examination Question 6 on page 58 For the approved mileage rates are:

RECAP  Recognise the factors that determine whether an engagement is treated as employment or self-employment. [2]  Recognise the basis of assessment for employment income. [2]  Recognise the allowable deductions, including travelling expenses. [2]  Discuss the use of the statutory approved mileage allowances. [2]  Identify P11D employees. [2]  Compute the amount of benefits assessable. [2]